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Spectra Earnings Up 24%; Capital Expansion Paying Dividends

Strong earnings from all of Spectra Energy's business segments, due primarily to higher commodity prices and sound operating performance in all underlying businesses, resulted in net income of $296 million (48 cents/share) in 3Q2008, up 26% from $234 million (37 cents/share) in 3Q2007, the company said.

Spectra's 2008 capital expansion plan is substantially complete and delivering returns on capital of approximately 12%, the top end of the company's targeted range, according to CEO Fred J. Fowler.

"Our balance sheet and almost $1.7 billion in available liquidity are real advantages for us during this volatile time in the financial markets, allowing us to feel confident about our ability to progress with our capital expansion program," Fowler said.

Spectra's U.S. transmission segment reported 3Q2008 earnings before interest and taxes (EBIT) of $213 million, including a $4 million charge for the final resolution of a customer bankruptcy settlement, compared with $230 million in 3Q2007. The decrease resulted from a $26 million variance in higher project development expenses, resulting primarily from the capitalization of project development expenses in the prior-year quarter. "Excluding this variance, U.S. transmission delivered strong earnings growth from expansion projects and higher earnings from capitalized interest on construction projects during the quarter," the company said.

The field services segment reported 3Q2008 EBIT of $239 million, up sharply from $140 million in 3Q2007. The increase was primarily due to higher natural gas liquids (NGL) prices, which correlate with higher crude oil prices (up to $118/bbl in 3Q2008 versus $76/bbl in 3Q2007), according to Spectra. The 3Q2008 results also benefited from non cash mark-to-market gains from hedges used to protect distributable cash flow at the master limited partnership of DCP Midstream, a venture of Spectra and ConocoPhillips, and derivative timing gains associated with gas marketing positions. The increases were partially offset by higher planned operating costs and the impact of Hurricane Ike on volumes and plant operations.

For the quarter, Denver-based DCP Midstream paid distributions of $269 million to Spectra Energy. In August DCP said it would "significantly" expand gas gathering and processing facilities in northeast Colorado to support growing production, (see NGI, Sept. 1).

The western Canada transmission and processing segment reported 3Q2008 EBIT of $113 million, compared with $101 million in 3Q2007. The increase resulted primarily from higher volumes and frac spreads that benefited the Empress operations, partially offset by higher operating expenses and higher repair and maintenance expenses.

Thanks to higher storage and transportation revenues, the distribution segment reported 3Q2008 EBIT of $44 million, compared with $40 million in 3Q2007, Spectra said.

Fowler, who helped launch Spectra as a spin-off from Duke Energy in January 2007 (see NGI, Jan. 8, 2007), is slated to retire at the end of the year. CFO Greg Ebel is in line to take his place.

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